Prime brokerage: Why a high touch service is critical for fund managers

By Chris Elliott, TD Cowen

Published: 18 September 2023

Chris Elliott, Head of Europe Prime Brokerage Business Development at TD Cowen explains what is meant by a high touch service and, importantly, why selecting a prime broker with a high-touch offering should be a priority for fund managers, particularly in the current climate.

When hedge funds are sizing up potential prime brokers to see which firms might best meet their needs, they have a lot of boxes to tick. So, it’s understandable that the subject of banks’ balance sheet trends is probably not the first thing on their minds. But there’s a good reason why this topic looms large and is worth dwelling on.

Put simply, banks – even the bulge bracket firms – do not have endless balance sheets. If anything, the sizes of balance sheets are starting to taper off after years of growth. Central banks themselves have been unwinding their quantitative easing strategies and looking to reduce their own balance sheets, which has knock-on effects.

For new and emerging funds in particular, all of this has implications. As the number of large providers has contracted, the remaining bulge bracket firms have ended up taking on lots of recently displaced clients. But they cannot simply expand their balance sheets ad infinitum in order to absorb these new clients while still retaining all of their existing ones. 

Instead, the biggest prime brokerage providers end up having to become more selective. The cold reality is, they need to make the call as to which funds will move the needle when it comes to their own business. It inevitably leads to dislocation and off-boarding.

The dislocation dilemma 

For funds that have themselves been off-boarded, their first priority is to think which providers are best placed to serve their needs. And for new funds that are just getting started, they need to think about whether they want to risk the chance of dislocation further down the road by focusing purely on the largest providers. We have been hearing from firms in each of these categories.

What both camps will have in common is that they would benefit from focusing on providers that have a high-touch service approach. It may come down to a fund’s size. Or it may be due to what a fund hopes to achieve. Or it may be because a fund is new to the market and likely to be encountering unfamiliar situations. 

In fact, this last consideration is increasingly the case in today’s markets, as risks accumulate from multiple directions. Unusual or unfamiliar market scenarios may be the result of macroeconomic shifts, regulatory changes, geopolitical factors, or a host of “unknown unknows”. 

Whatever the cause, having a prime broker in your corner that can help you deal with the unfamiliar is a big plus – and therefore finding the right prime broker to help you to navigate today’s market is absolutely critical to the fund’s success.

Defining a high touch service

A high touch service covers a range of things, including:

  1. A client-centric approach: working around the client, not the other way around – for example, tailoring a system or process to fit the client’s requirements, or if new or different functionality is needed, figuring out a way to deliver exactly what the client needs. Many prime brokers may have evolved their offerings over the years, but a client-centric service approach requires being flexible in incorporating client needs immediately, not over time.
  2. Responsiveness: Another important element concerns how quickly issues can be escalated. Partner with a prime broker that has a flat structure which is easy to navigate. This means that if a client does have any issues, they are not far away from senior management. Busy hedge fund managers have enough to worry about without having to deal with slow, bureaucratic processes from their prime brokers. They need to know they will be listened to and responded to, quickly.
  3. A holistic approach - supporting the whole business. A prime broker needs to have the experience and resources to offer a full suite of services, from raising capital to trading and execution to operational support to consulting. 

A return to normalcy?

The prime brokerage industry has been in a state of flux for the past couple of years, which makes the question of who to pick and what factors to weigh all the more complicated. 

How long the dislocation trend will continue, no one can say for certain. But we do know that more funds are launching, offering signs of a return to normalcy for a hard-hit buy-side community.

Quarterly data for fund launches at one point in 2022 reached their lowest level since the 2008 financial crisis, but Q4 showed a 35% jump to 96 launches, according to HFR data. It means more funds are going to need to navigate a tricky prime brokerage landscape. Focusing on high-touch service could be one of the keys to their success.

Cowen International Limited (CIL) is authorised and regulated by the Financial Conduct Authority.